Four years ago, when Congress began debating the 2017 Tax Cut and Employment Act, the commercial real estate industry came together like never before to protect Section 1031, the similar exchange provision of federal tax legislation, from legislation oblivion.
In contrast to certain extremist think tanks 'long-term listing of similar exchanges on the "unjustified loopholes" list, the House Republicans' threat to Section 1031 in the latest tax reform bill was a clear and present threat. This was because their plan included the concept of instant real estate expense allowance. The policymakers driving this particular tax reform move called the blueprint saw no need to maintain a deferred tax exchange mechanism in a world where the cost of any type of property investment could simply be written off in the year of purchase .
Trading groups and alerted business practitioners, realizing the imminent threat to one of the growth engines of real estate, came together to educate members of Congress and their staff about economic growth and the benefits of job creation in Section 1031.
During a coordinated operation lasting several months, a veritable brigade of determined coalition members met with a high percentage of members of Congress from both sides of the political aisle. Armed with studies, surveys, and statistics, the coalition wanted to convince policymakers that maintaining Section 1031 on real estate is essential in a bill to create employment and invest in communities. Those efforts paid off and the suspension ball was dodged for property swaps.
"Now is the worst time imaginable to inflict further damage on a commercial real estate sector that is being horribly damaged by the pandemic."
Fast forward to September 2020 and a new and perhaps even greater threat has emerged. This time, to offset the cost of various spending programs, the Democratic Party has killed 1031 and other so-called “unproductive and unequal tax breaks for real estate investors”, at least in certain cases.
Too many policymakers fail to understand how powerful real estate markets can be in efforts to get our economy back from its slump. It's faster and easier to just believe a slogan about unscrupulous investors ravaging society with tax laws.
To meet this new threat, those who understand the growth benefits of peer-to-peer exchanges must once again respond to the call to action, organize and prepare their members of Congress and those running for those offices. This process has already started. A monumental study of the effects of real estate exchanges on the economy has been updated to capture the latest data and trends. This paper, written by two eminent university professors, was instrumental in convincing skeptics and friends of the need to keep 1031 last time. The new study found that the exchange of like species increased significantly from 2016 to 2020 and that they are still mainly used by small investors and business owners. Hopefully with the updated data, economists can convince fair policymakers that now is the worst time to further harm a commercial property sector horribly damaged by the pandemic and to take away a vital tool in rebuilding our economy.
Commercial REALTORS® can play a key role in this educational process. Who knows the parishes and economies of the states and districts of the Senate and House members better? Who better to bring together key business leaders to meet with policy makers and convince them that success in rebuilding and recruiting depends on carefully planned property development, which in many cases is based on the foundation of similar exchanges? Please think about how you can support this important effort.